Published on: December 9, 2024

RBI’S MONETARY POLICY UPDATES (DECEMBER 6 2024)

RBI’S MONETARY POLICY UPDATES (DECEMBER 6 2024)

Cash Reserve Ratio (CRR) Cut

  • Announcement: CRR slashed by 50 basis points (bps) to 4% (from 4.5%).
  • What is CRR:
    • Percentage of a bank’s total deposits maintained in liquid cash with the RBI.
    • Banks do not earn interest on this reserve.

Why CRR Was Cut

  • Boosting Liquidity:
    • Frees ₹1.16 lakh crore in the banking system.
    • Augments banks’ lendable resources, fostering credit availability.
  • Economic Challenges:
    • Tightened liquidity due to RBI’s actions to stabilize the rupee and large dollar sales.
    • Liquidity pressures increase due to advance tax payments, GST, and quarter-end credit demand.
  • Impact:
    • Banks can lend surplus funds, spurring economic growth.
    • Potential benefits for borrowers if banks pass on the CRR cut.

Repo Rate Decision

  • Current Repo Rate: Unchanged at 6.5%.
  • Significance:
    • 11th consecutive monetary policy keeping the rate steady.
    • Majority decision (4-2) indicates differing views within the Monetary Policy Committee (MPC).
  • Reasons:
    • Persistent food inflation pressures.
    • Need for durable price stability to secure long-term growth.

Impact on Borrowers

  • Positive Impact:
    • Repo-linked external benchmark lending rates (EBLRs) remain steady, preventing an increase in EMIs.
  • Mixed Impact:
    • Liquidity surge may lead to marginally lower deposit rates.
    • Interest rates linked to the marginal cost of fund-based lending rate (MCLR) may rise.

GDP Growth Forecast Revision

  • Revised Forecast:
    • FY25 GDP growth estimate reduced to 6.6% (from 7.2%).
  • Reasons for Reduction:
    • Economic slowdown in the second quarter.
    • Real GDP dropped to 5.4% in July-September 2024 (lowest in seven quarters).
    • Positive recovery signs from festive demand and rural consumption.

Inflation Forecast

  • Revised Estimate:
    • FY25 retail inflation forecast increased to 4.8% (from 4.5%).
  • Key Reasons:
    • Consumer Price Index (CPI) inflation rose to 6.21% in October 2024 (highest in 14 months).
    • Inflation consistently above RBI’s target, limiting room for rate cuts.

Implications for the Economy

  • Liquidity Management:
    • CRR cut enhances banks’ credit capacities, supporting growth.
    • Balancing inflation and growth remains a challenge.
  • Policy Stance:
    • MPC retains a “neutral” stance to respond flexibly to evolving economic conditions.

Outlook

  • Growth Challenges: Recovery hinges on sustainable demand and investment.
  • Inflation Control: Persistent focus on maintaining price stability amidst global and domestic pressures.